Spotify Q3'25 flash comment: Profitability surprised on the upside

Source: Inderes & Bloomberg (consensus, 34 estimates)

Spotify’s Q3 print came in above our top- and bottom-line estimates. Similarly, growth in the user base exceeded our forecast, driven by stronger development in ad-supported user. Q3 guidance was a bit below on revenue and subscriber growth relative to consensus, while the profitability outlook was stronger than expected. Wall Street appears more focused on the latter, with shares up some 5% in pre-market trading. Following the report, we see modest downward revisions to our short-term revenue estimates, but upward pressure on margins.

User growth and revenue above estimates and guidance

MAUs reached 713m (Q3’24: 640m), which was +3m above our estimate of 710m (guidance: 710m, Street: 711m), led by strong development in Rest of the World, Europe, and North America. The global launch of mobile free tier enhancements as well as executed marketing campaigns in select developing markets contributed positively to MAU growth. Premium subs came in at 281m (Q3’24: 252m), in line with our and Street’s estimates as well as of guidance. Ad-supported users increased by 13m q/q, compared to our forecast of +10m (Street: +9m).

Premium ARPU was EUR 4.53 (Inderes: EUR 4.51, Street: EUR 4.50), down 1% q/q and 4% y/y, with FX headwinds reducing reported premium ARPU growth by roughly 400bps. As such, premium ARPU, on a FX neutral basis, was flat y/y (Q3’24: EUR 4.71), in line with guidance. While price increases in markets such as France, Belgium, and the Netherlands earlier this year, along with broader hikes later in the quarter, had a modest positive impact on FX-neutral ARPU, this was offset by product and geographic mix effects. For instance, current strong subscriber growth in emerging markets have a dilutive impact on ARPU in the short term given lower pricing in these regions.

Q3 revenue grew 7% y/y (FX-neutral: 12%) to 4.27 BNEUR, which was above our and Street’s 4.23 BNEUR forecast. Premium revenue grew 9% (13% FX neutral) to 3.82 BNEUR (Inderes est: 3.76 BNEUR), while ad-supported revenue came in at 446 MEUR and below our estimate of 473 MEUR, mainly due to softness in pricing and podcast inventory optimization. For Q4, the company anticipates a 620 bps FX headwind to revenue growth at current currency rates.

Increased scaling effects in R&D, improved gross margin in the ad-supported segment and lower social charges behind EBIT beat

Gross margin came in above guidance, reaching 31.6% (Q3’24: 31.1%), which surpassed our and Street’s estimate of 31.1%, primarily driven by improvement in the ad-supported segment. The company guided for a gross margin of 32.9% in Q4’25, above our estimates of 32.6% (Street’s: 32.6%) heading into the Q3 report and reflected continued favorability in the ad-supported segment.

Operating income (EBIT) was 582 MEUR (Q3’24: 454 MEUR), corresponding to a 13.6% margin. This was well above the company’s guidance of 485 MEUR as well as our (503 MEUR) and Street’s (497 MEUR) estimate. Social charges* were 41 MEUR below the company’s guidance (25 MEUR) and therefore benefited reported EBIT. As such, the positive impact from social charges was 16 MEUR higher than our estimate, as we had assumed no impact on EBIT due to the share price movement in Q3 (-9%). Operating expenses decreased by -2% y/y (11% FX neutral and excl. social charges) and in relation to revenue, these were about 120 bps below our forecast, primarily driven by lower-than-expected R&D and G&A expenses.

Spotify’s reported free cash flow reached 806 MEUR (Q3’24: 711 MEUR), equivalent to a 19% margin, and was in line with our estimated ~805 MEUR**. The liquidity and balance sheet continued to improve, with the net cash position amounting to 6.9 BNEUR (incl. leases). During the third quarter, Spotify repurchased shares worth approximately 77 MEUR, leaving around 1.8 BNEUR of remaining authorization under its upsized 2 BNEUR share repurchase program, which runs through April 2026.

Q4 Guidance below estimates on revenue, but above on EBIT and MAU growth

Spotify guided to Q4 MAUs of 745m, above both Street’s estimate (741m) as well ours (739m). However, Premium subs guidance of 289m came in short of our 292m and Street’s 290m, implying +8m q/q growth. Revenue guidance of 4.5 BNEUR (6% y/y) was below our and Street’s 4.6 BNEUR, largely due to FX effects (~620 bps headwind) and lower implied subscriber growth. Q4 EBIT guidance of 620 MEUR, implying a 13.8% margin, exceeded our 12.9% and Street’s 13.4%.

Prior to the Q3 print, our revenue estimate for 2025 stood at 17 BNEUR (+10% y-y) with an 11.7 % EBIT margin. Following the Q3 report, we see small downward pressure on our short-term revenue estimates, due to lower-than-expected subscriber growth implied by the guidance and higher FX headwinds, while we view the long- growth story remains intact. However, we see upward pressure on margins, as we feel Spotify continues to demonstrate improved efficiency. We think the profitability shown in the Q3 report clearly shows how Spotify increased adoption of AI across operations are driving smarter, faster execution and stronger scaling effects within R&D, and thus, enabling greater operating leverage than we previously anticipated.

* Social Charges are payroll taxes that vary with Spotify’s stock price due to their link to share-based compensation in certain countries.

**Adding back e.g. SCB and excluding lease payments to make it easier to compare our estimate to reported figures